Morrison v. Mahaska Bottling Co.

• Decision Date: 19 October 1982
• Citation: 39 F.3d 839
• Parties: Craig MORRISON, Executor of the estate of Arnold John Muhl; Craig Morrison, Co-Trustee of the June Morrison Living Trust dated
• Court: U.S. Court of Appeals — Eighth Circuit

Page 839

39 F.3d 839

Craig MORRISON, Executor of the estate of Arnold John Muhl Craig Morrison, Co-Trustee of the June Morrison Living Trust dated October 19, 1982, for June Morrison, individually Zayda Morrison Balkus, Co-Trustee of the June Morrison Living Trust dated October 19, 1982, for June Morrison individually; Craig Morrison, an adult individual Custodian of Craig Morrison; Zayda Morrison Balkus, an adult individual, Custodian of Zayda Morrison, Plaintiffs-Appellants, v. MAHASKA BOTTLING COMPANY; John A. Muhl, Defendants-Appellees.

No. 93-3340.

United States Court of Appeals, Eighth Circuit.

Submitted April 15, 1994.

Decided Nov. 1, 1994.

Donald A. Wine, Des Moines, IA, argued (C. Carleton Frederici, on the docket), for appellants.

W. Don Brittin, Jr., Des Moines, IA, argued, for appellees.

Before BOWMAN, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and HANSEN, Circuit Judge.

PER CURIAM.

The plaintiffs appeal the district court's judgment in this diversity stockholder's suit. The dispute arises from a stock redemption agreement entered into between Arnold J. Muhl and the Mahaska Bottling Company (Mahaska). The plaintiffs challenge the district court's determinations that Arnold Muhl's estate was not entitled to vote his stock at an annual stockholders' meeting held on April 30, 1990, that Mahaska did not breach the stock redemption agreement, and that the book value of the company at the time of redemption should not be increased by the amount of the damages awarded to Mahaska for breach of fiduciary duty committed by Mahaska's chief executive officer. We affirm in part and reverse in part.

I.

The Mahaska Bottling Company, an Iowa corporation formed in 1947 with its principal place of business in Oskaloosa, Iowa, holds a franchise for bottling Pepsi Cola. Mahaska is a closely held corporation owned by the Arnold Muhl family. Arnold had two children, John Muhl and June Morrison. John, who is the chief executive officer of Mahaska and a defendant in this case, has four children. June has two children who are the plaintiffs in this case.

This suit boils down to a sister-brother fight for control of their deceased father's corporation. The legal dispute at issue stems from a stock redemption agreement entered into by Arnold as an estate planning tool. Arnold wanted to keep the corporation in the family, controlled by his son John. Arnold also wanted to insure that his wife (Zayda) and daughter (June) would be provided for following his death. To this end, Arnold and Zayda each entered into separate, but nearly identical, stock redemption agreements which provided that upon their deaths, Mahaska would purchase all of their shares of Mahaska stock at book value as of the year preceding their deaths. Arnold's will created a trust to hold his shares until surrendered to the company and provided that all of his assets would pass first to his wife Zayda and then to June and her children. Arnold's son John and his family would thereby retain control of Mahaska.

In 1982 when the stock redemption agreements were executed, Mahaska had 13,600 outstanding shares of stock. Arnold owned 3,217 shares and Zayda owned 3,664 shares; and together they owned slightly over fifty percent of Mahaska's outstanding shares. John and his children owned a total of 5,821 shares. June and her children owned the remaining 898 shares.

Arnold died on January 10, 1990, a resident of the state of California. Pursuant to the terms of the stock redemption agreement, Mahaska determined the book value of Arnold's shares, made the required cash deposit with the escrow agent, and delivered an executed promissory note and security agreement for the balance of the contract purchase price. Mahaska also sent a notice of redemption to June, who was then serving as the executor of Arnold's estate, in the form required by statute for corporate redemptions.

The stock redemption agreement required the estate to tender Arnold's shares to the escrow agent after Mahaska had made the downpayment and delivered the note and security agreement. Concerned that the book value had been artificially depressed by her brother John's wrongful depletion of company assets for personal use, June refused to tender the stock. Instead, June attended the annual shareholders' meeting on April 30, 1990, and attempted to vote Arnold's shares in favor of her own nominees to the board of directors. June was unsuccessful in attempting to elect her nominees because Mahaska did not allow her to vote Arnold's shares. Nevertheless, June's nominees (herself, her son (Craig Morrison), and her daughter (Zayda Balkus)) subsequently met in Newport Beach, California, on October 25, 1990, and purporting to act as Mahaska's board of directors, resolved to rescind the stock redemption agreements executed by Arnold and Zayda Muhl.

On April 27, 1990, the plaintiffs filed this action in federal court based upon diversity of citizenship. Their recast and substituted complaint alleged several claims, including a shareholders' derivative claim for breach of fiduciary duty, breach of the stock redemption agreement, fraudulent inducement, rescission, and tortious breach of an implied covenant of good faith and fair dealing. The complaint also sought an accounting to determine the extent to which company assets had been wrongfully depleted and a declaratory judgment to establish that the estate was entitled to vote Arnold's shares. Mahaska asserted the statute of limitations as an affirmative defense and counterclaimed for a declaratory judgment establishing that the stock redemption agreements of Arnold and Zayda Muhl are valid and enforceable, that the estate is required to tender Arnold's shares pursuant to the agreement, and that the estate was not entitled to vote Arnold's shares.

The legal claims of breach of fiduciary duty, fraudulent inducement, and breach of the stock redemption agreement were tried to a jury in November 1992. By special verdicts, the jury found that John Muhl had breached his fiduciary duty to Mahaska, causing a loss of $578,405, of which $136,769 was barred by the statute of limitations because it was incurred before 1985 (leaving a net award of $441,636). The jury also assessed $77,958 in punitive damages against John Muhl. The jury determined the remaining claims in favor of the defendants, finding that Arnold and Zayda were not fraudulently induced into entering the stock redemption agreements and that Mahaska did not materially breach the stock redemption agreements. The district court entered judgment in accordance with the special jury verdicts, granting $441,636 in compensatory damages and $77,958 in punitive damages plus interest.

The district court then considered the equitable claims and declared that the stock redemption agreements entered into by Arnold and Zayda are valid and enforceable according to their terms, that the estate was not entitled to vote Arnold's shares at the stockholders' meeting, and that the estate is required to tender Arnold's shares to Mahaska. The district court also determined that the book value of Mahaska was $10,662,880 as of September 30, 1989, the year preceding Arnold's death. ¹ The district court did not add the jury award for breach of fiduciary duty to the September 30, 1989, book value. The plaintiffs appeal.

II.

In a federal diversity action, state law governs the substantive issues. See Adams v. Fuqua Indus., Inc., 820 F.2d 271, 273 (8th Cir.1987). We honor the agreement's choice of law provision and apply Iowa law to govern the substantive issues.

The plaintiffs raise three issues on appeal. They contend that the district court erred (1) in determining that June was not entitled to vote Arnold's shares at the April 30, 1990, shareholders' meeting, (2) in finding that Mahaska did not breach the stock redemption agreement as a matter of law or alternatively, in denying the plaintiffs' motion for a new trial, and (3) in not adjusting the book value of Mahaska on September 30, 1989, to reflect the jury award for breach of fiduciary duty. We affirm the judgment of the district court on the first two issues but reverse and remand on the third issue.

A. Voting Rights

The plaintiffs contend that the district court erred in declaring that the estate was not entitled to vote Arnold's shares at the April 1990 annual shareholders' meeting. Specifically, they contend that the provision of Iowa law invoked by Mahaska to prevent the estate from voting does not govern the terms of this stock redemption agreement. We agree that the statute does not apply to this stock redemption agreement, but we conclude that the agreement itself precluded June from voting the shares for the estate.

Ordinarily, except under certain enumerated circumstances, Iowa law prescribes that "each outstanding share, regardless of class, is entitled to one vote on each matter voted on at a shareholder's meeting." Iowa Code Ann. Sec. 490.721(1). Mahaska refused to allow the estate to vote Arnold's stock at the shareholders' meeting, relying on its compliance with the statutory redemption requirements of notice of redemption and deposit of a sufficient sum. The statute on which Mahaska relied provides as follows: "Redeemable shares are not entitled to vote after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares." Iowa Code Ann. Sec. 490.721(4) (West 1991).

Mahaska's reliance on this statute, however, was in error. The statutory reference to "redeemable" shares in Sec. 490.721(4) addresses a class of shares which are designated as redeemable in a company's articles of incorporation and issued as such. See Iowa Code Ann. Sec. 490.601(3) (the articles of incorporation may authorize a class of shares that are "redeemable"...